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FINC 304

MANAGERIAL ECONOMICS

Session 0 – INTRODUCTION TO MANAGERIAL


ECONOMICS

Lecturer: Dr. AGYAPOMAA GYEKE-DAKO, UGBS


Contact Information: agyeke-dako@ug.edu.gh

College of Education
School of Continuing and Distance Education
2014/2015 – 2016/2017
General Overview of Managerial
Economics
• This course is designed to provide a solid foundation
of economic understanding for use in managerial
decision making. The course will build on students’
existing knowledge of microeconomic theory in
economics towards becoming more competent
decision makers and managers. The course will also
engender students’ knowledge of various
frameworks for analyzing business decisions through
the application of economic theory to business
problems, thereby developing general principles that
can be applied to business decision-making.

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 2


General Objectives
• The course will:
• Provide students with knowledge and understanding of
the economic principles governing business decision
making
• Inform students of the theoretical and practical aspects
of managerial economics
• Develop students’ knowledge and understanding of key
issues in the theory and practice of managerial
economics while applying knowledge of economics and
quantitative methods
• Offer the opportunity to students to develop key skills

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 3


General Structure of the Course
• In the first session it will provide an overview of
managerial economics. It will then provide a much
detailed discussion on the application and analysis of
demand and supply. A discussion on Production and Cost
will give a more detailed understanding on Supply and
help determine the optimal level of inputs firms need to
select given the constraints they face. This will lead us
naturally on to market structure which discusses how
firms have to select price and output in the different
markets to maximize profit. We will then move on to
discuss game theory which is a tool used to analyse the
strategic behavior of firms.

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 4


Session Overview
In this session we provide a brief introduction on what
managerial economics is all about. We specifically define the
concept of managerial economics and discuss seven principles
managers can adopt to become effective. These seven principles
will guide us through our study as we adopt each of them in the
different topics we will treat.

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 5


Session Outline
The key topics to be covered in the session are as follows:
• Introduction to Managerial Economics
• Principles of becoming Effective Managers

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 6


Reading List
• Main Textbook
Baye Michael R. and Prince Jeffery T. 8th Edition

• Information from popular business press such as BBC news,


the Economist, Wall Street Journal and Business and Financial
Times

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 7


HEADLINE
• Norwegian Cruises is a company that owns and manages a large
fleet of ships primarily used for cruises along the Norwegian fjords.
Following a spike in tourist arrivals in Norway, Kristofer, the
company’s managing director decided to increase the company’s
fleet by acquiring another rival business. With the short-term
interest rate at 8 percent, Norwegian Cruises used $9 million of its
retained earnings to acquire the assets and settle the debts of
Fjords Unlimited, a local struggling business providing similar
services. Kristofer’s acquisition was based on predicted additional
annual sales of $2million over the first five years. After close of
review of the acquisition, the board of directors qualified Kristofer’s
performance as poor and decided to immediately terminate his
employment and appoint Anngerd, Kristofer’s assistant manager, as
the acting managing director. Do you know what motivated the
termination of Kristofer’s employment?
Source: Baye and Michael, 8th Edition

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 8


Definitions of Concepts

• Economics is the study of how individuals, firms or


governments make choices to satisfy their wants in the
presence of scarce resources”

Manager

• A person who oversees resources or direct the efforts of


others
• A person responsible for making important decisions and
who is not just responsible for his own actions but
responsible for the actions of others
Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 9
Managerial Economics
• Combines both definitions
 Study of how to direct scare resources in the most efficient way to
achieve managerial objective
• Applied microeconomics with much emphasis on the topics that are of
interest to managers
 Broad Discipline
• Covers household decisions on how to apportion resources to maximise
their welfare
• Choice between inputs and which products to produce to maximise firm
profit
• Government decision to allocate resources to sectors
• NGOs choosing between projects to maximise community benefits
 Since broad, we concentrate on firm managerial decisions in this course

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 10


Principles of Making Effective
Managerial Decisions

• Identify goals and constraints

• Recognize the nature and role of profits

• Understand the power of incentives

• Understand markets
• Recognise Time Value of Money
• Use Marginal Analysis

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 11


Identify Goals and Constraints


 Goals have to be well-defined
Identifying
which you yourmove.
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will be different from if your goal is to make a C.
Same applies to the firm. Goal identification gives a clear sense of direction

 Scarcity means there will always be


constraints
• Know that your goal will be limited by your constraints
Eg of constraints managers will encounter include input prices,

available technology, limited income etc

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 12


Nature and Role of profits
 Traditional goal of the firm is to maximise
profit
 How is profit defined: accounting profit or

economic profit?
• accounting profits=revenue minus explicit cost
• economics profits=revenue minus total opportunity cost
• Explicit & implicit cost=total opportunity cost


 Is profit maximization good for society?
• Some assume that firms seeking profit end up ripping
society off. However, profits can send a signal to people
as to where society’s resources are best needed.
• This helps society know where resources should move
Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 13
Understand Power of Incentives
• Organisations are usually not managed by their owners
but are managed by managers

• Managers may want to work in their own interest which


may not be in the interest of shareholders

• They may prefer leisure to work

• Use incentives to align the interest of managers to that


of shareholders

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 14


Understand the Power of Incentives
• Economic agents respond to incentives

• Incentives play an important role in guiding


decisions of others

• Businesses have to structure incentives in a


way that will get people to make sound
economic decisions

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 15


Understand Markets
• Every transaction in a market has a buyer and a
seller

• Final outcome of the market depends on the


relative power of the two sides in the transaction

• Three rivalries determine the bargaining power of



each side:
consumer-producer rivalry, consumer-consumer
rivalry and producer-producer rivalry

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 16


Understand Markets
• Consumer-Producer Rivalry: consumers want low
prices, producers want higher prices. Eventual
winner depends on who wins the bargain

• Consumer – Consumer Rivalry: arises because of


scarcity. The consumer willing to pay the higher price
is the one who will go with the good

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 17


Understand the Power of Incentives
• Producer-Producer Rivalry: arises because
consumers are scarce. Producers who give the best
quality goods and the lowest price will go with the
good

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 18


Recognise the Time Value of Money
• A cedi today is worth more than a cedi tomorrow
• Economic decisions should be made bearing in mind this
• Use PV analysis for benefits as cost will be borne today
 Present Value Analysis

• the present value (PV) of a future value (FV) received n


years in future is
𝐹𝑉
• PV =
(1+i )n
• Compare benfits to cost after this

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 19


Use Marginal Analysis

 Totals may mislead as they are not able to tell you


whether it is worth taking on another unit
• Marginals are useful
• Marginal analysis reflects the notion that most choices
involve relatively small (incremental) increases or
decreases in production (or consumption).


 Economic decisions are made at the margins
• we compare marginal benefit of the decision and
the marginal cost to make economic decisions

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 20


Answer to Headline Question
• Why was Kristofer’s employment at Norwegian Cruises terminated? At
first glance, the decision to acquire Fjords Unlimited seemed sound as it
could have generated $10 million in additional revenues over the first five
years. Given the $9 million price tag, Kristofer apparently viewed the
acquisition as a good deal. The board of directors, on the other hand, did
not agree. To understand their reasoning, one must take into account the
prevailing short-term interest rate, the acquisition cost, and the projector
revenue flows. Assuming no other costs associated with the acquisition,
the projected net present value to Norwegian Cruises of acquiring Fjords
Unlimited was -$1,014,580 which means that Kristofer should have
expected Norwegian Cruises to lose over $1 million by acquiring Fjords
Unlimited.
• The board of directors fired Kristofer because of his judgment and failure
to recognize the time value of money in his decision to increase
Norwegian Cruises fleet size through the acquisition of Fjords Unlimited.

Agyapomaa Gyeke-Dako(PhD) 4/27/2018 Slide 21